UAE Central Bank looks to direct debits as alternative to cheques

Bounced cheques: The Central Bank moves towards a national pilot programme for direct debits, which bankers say will help move the UAE away from reliance on cheques.

Banks are broadly in favour of a move away from use of cheques towards an alternative system that is more robust. Silvia Razgova / The National

The Central Bank is preparing to implement a federal direct debit system, widely viewed as moving the Emirates one step closer towards a national credit bureau and reducing banks' reliance on cheques.

Commercial lenders had discussions with the Central Bank last week on the programme. The bank is preparing to formally announce the plan later this month, said banking sources.

Direct debits are regular payments paid automatically from bank accounts at agreed intervals. While some select Dubai and Abu Dhabi government and private entities already have a system in place, the new system would be rolled out nationally.

A pilot programme was being developed and is expected to be rolled out next year, said Suvo Sarkar,the general manager of retail banking at Emirates NBD. The benefit would be that banks could reduce their reliance on post-dated cheques.

"That will reduce the number of cheques we're seeing," he said. "It'll still happen … but anything which is regular in nature will be used more and more through this system."

The move will allow greater access to direct debits, not just to other emirates but also different segments of the market, said Eyad Al Kourdi, the country head for the UAE at MasterCard Worldwide.

"Today what will happen is, if you walk to Adwea [Abu Dhabi Water and Electric Authority] and you want to pay your home bill, you can instruct them to debit your bill directly, and Dubai has its e-Government," he said.

"[Now] the switch for the whole UAE is going to support it."

It would also allow customers who have prepaid cards but not bank accounts to have access to direct debits, he added. "What it'll do now is widen up the base," he said.

The new system would be in place for some products by the second quarter of next year, according to two banks, and would eventually cover mortgages, credit card payments and long-term loans.

The Central Bank was conducting a number of regulatory drives with the intent of "eliminating the unnecessary laws" in the Emirates' financial system, with the aim of making retail banking "more convenient for the public", said a source at one of the banks.

"They're looking at the laws and regulations they made many years ago, and it's not working any more," said the banker .

It could also help to speed the implementation of a federal credit bureau, giving the UAE Government greater oversight over financial transactions at a national level.

Banks are broadly in favour of a move away from use of cheques towards an alternative system that is more robust.

Last month, The National reported that 1.5 million cheques used for payment were returned as invalid last year, representing payments worth Dh55.3 billion (US$15.05bn).

It is unclear how many of those cheques failed as a result of tears or missed details and how many failed because they bounced, which if committed by expatriates is a criminal offence in the UAE.

The figure prompted criticism from bankers, with Noor Islamic Bank's chief executive advocating a move to an alternative system, and politicians such as the Federal National Council member Ali Al Nuaimi, who called on the Central Bank to review the rate of failure.

On Sunday, the Central Bank's board said it had discussed banking policy, including a reviewed draft of regulations on property loans.

The Central Bank declined to comment on the direct debit programme.